How did the market interpret Powell's speech as favorable just from a headline?

Well, when the theme of his speech was released, there was no need to say anything, the market instantly priced in this dovish stance...

His speech theme: With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance..

Isn't it a case of recognizing every word but not understanding how they fit together? How did it become a big dove??

Let's translate it directly: In the current policy's restrictive territory, the baseline outlook and the changes in the balance of risks may require us to adjust our policy stance..

Why was it interpreted as favorable?

"policy in restrictive territory" → already very tight

The Federal Reserve acknowledges that current policy is clearly in a contractionary range, which is the first signal.

This means there is almost no room for further rate hikes, and even maintaining this level could crush the economy.

"baseline outlook" + "shifting balance of risks"

Baseline outlook: Refers to the Federal Reserve's mainstream forecast for the economy and inflation.

Changing balance of risks: Previously, risks were tilted towards inflation, but now they acknowledge that risks are starting to shift towards economic weakness.

These two terms together imply that the macro risk structure has changed; the Federal Reserve's targets are no longer solely focused on inflation but must also consider growth and employment.

"may warrant adjusting our policy stance" → may require adjusting policy stance

Adjusting the stance typically means moving from tightening to easing.

In the current high-interest rate context, the most direct policy adjustment would be to cut rates or at least to stop tightening early.

So when traders see this theme, they generally associate it with:

The rate hike cycle is officially over

The conditions for rate cuts are gradually being met

Expectations for liquidity returning are strengthening

Thus -> big dove...